Google Surges 13%: Price Targets Zoom to $1,220 on Q3 Beat

By Tiernan Ray

Shares of Google (GOOG) today closed up $110.91, or 12.5%, at $999.70, after crossing the $1,000 line and hitting a high of $1,015.46, following better-than-expected Q3 results yesterday afternoon, with CEO Larry Page saying the company was making progress in stitching together all its properties to reach users on any device at any time.

Google beat expectations that came down substantially in July when the company missed revenue estimates, sending its shares tumbling. The consensus for Q3 revenue back at that time had been $15.2 billion, according to FactSet, versus the $14.79 billion consensus yesterday, which Google beat, reporting $14.89 billion. EPS had also been reset, falling from $11.19 back in June to $10.36 per share just before last night’s report.

But bulls were heartened by what they saw as a reversal of problems in the June quarter with the roll-out of a new ad mechanism, “Enhanced Campaigns.” With 26% growth in the volume of paying ads, and an 8% decline in pricing, many concluded that Google has finally gotten enhanced campaigns firmly in hand and is poised to benefit from the new product.

There were no ratings changes today, that I could see, but price targets were zooming. Even bears like BMO‘s Dan Salmon seem fairly charmed by the company’s evident progress with ad formats.

Ross Sandler, Deutsche Bank: Reiterates a Buy rating and raises his price target to $1,220 from $970. “We think the worst is behind Google from a sentiment perspective, and looking into 2014, we see several catalysts including: 1) revenue from Enhanced Campaigns, Local, Mobile and Display/YouTube continuing to drive accelerating growth, 2) easy comps in Network, and 3) improving margins as the company comps Nexus and accounting policy changes. We have increased our 2014E EPS by 14%, and would continue to add to positions [...] There were few negatives to point to in the quarter. Networks revenue of $3.15B was flat Y/Y, down 1% Q/Q, largely a result partner network policy changes. The MMI business continues to underperform, generating EBITDA margin of only 4% on sales of $1.18B. Management reiterated that it doesn’t think of the MMI business in quarterly terms and that it is focusing on building out MMI’s marketing and distribution. Capex remained elevated at $2.3bn, weighing on FCF, which declined 11% Y/Y in the quarter, though much of this came from land purchases, as cash from operations increased 27% Y/Y the fastest growth since 3Q11.”

Colin Sebastian, R.W. Baird: Reiterates an Outperform rating on the stock, and a $1,000 price target. “Google continues to benefit from unparalleled technology sophistication, and we believe remains on track to leverage multiple growth opportunities (e.g. mobile, video, enterprise, local, wearables, etc.) [...] One notable positive was that the short-term disruption caused by the July switch over to Enhanced Campaigns was not clearly evident in results, and management said the overall feedback from advertisers has been positive. Importantly, Google’s recent enhancements to cross-device measurement and attribution should help “close the loop” for advertisers, and eventually lead to higher mobile search pricing. Key incremental datapoints include: (i) Approximately 40 million phone calls are driven by Google mobile ads per month (+100% Y/Y); (ii) Approximately 40% of YouTube traffic comes from Mobile devices (vs. 6% in 2011); and (iii) Brand advertising by CPG clients has increased 75% Y/Y.”

Carlos Kirjner, Bernstein Research:Reiterates an Outperform rating and raises his price target to $1,200 from $1,000. We think YouTube is growing north of 30% and Google search revenues have been growing in the high teens or low twenties (Exhibit 2). We also believe there is still much improvement to come in the performance of search, for advertisers and for users1. Google has shown us that it can improve and evolve search and advertiser ROI through algorithmic changes and new ad formats. As a result, we expect search to grow in the double digits for several years to come. In our view, the cash flows from future search revenues alone are enough to justify buying the stock2. This leaves other multibillion dollar and we believe rapidly growing businesses such as YouTube and the Network3, and less mature businesses with high potential such as Compute Engine, Play, Apps and devices, as free upside options.”

Eric Sheridan, UBS: Reiterates a Buy rating, and raises his price target to $1,100 from $1,020. “Throughout Q3 2013, investors were increasingly concerned about the impact of Google’s Enhanced Campaign and Product Listing Ad (PLA) transition for its core advertising business. Core Website Gross Revs growth of 22% YoY laid to rest investor concerns as Google continued to grow its share of digital advertising budgets at a very healthy rate for a company with 30%+ market share of digital advertising. As we move from 2H13 to 1H14, we believe that Google’s innovation in digital advertising will allow the company to produce above digital ad market growth rates [...] Google is quickly transforming into a digital economy powerhouse by addressing consumer & enterprise needs across technology hardware, software/services/apps, ecommerce and cloud computing. In the coming years, we expect Google to be the main beneficiary of many of the themes (mobile, personalization, social and disruption/innovation) that will drive secular growth in the Internet.”

Martin Pykkonen, Wedge Partners: Wedge doesn’t have formal ratings, but Pykkonen sees the stock’s valuation as “attractive.” “Google is quickly transforming into a digital economy powerhouse by addressing consumer & enterprise needs across technology hardware, software/services/apps, ecommerce and cloud computing. In the coming years, we expect Google to be the main beneficiary of many of the themes (mobile, personalization, social and disruption/innovation) that will drive secular growth in the Internet [...] GOOG’s conference call comments yesterday included a reference to online advertising benefiting from a spending shift from TV advertising (which would obviously benefit GOOG and others). GOOG’s comments are typically very measured and ultimately accurate. We think YouTube is attracting strong advertiser attention for its focus on content for young adult audiences and (along with events like last spring’s Newfront) is gaining large brand advertiser mindshare. Even without another downdraft in live TV ratings this season (vs. last year’s > 10% ratings decline), we still think there could be an accelerating shift from TV towards online advertising, especially since Nielsen’s time-shifted viewing measurements are still a work-in-progress.”

Dan Salmon, BMO Capital Markets: Reiterates a Market Perform rating on the shares, and an $890 price target. “CPC trends weakened as expected, but strong volume growth made up for it. Marketers strategy adjustments for the upgraded AdWords platform and continued rollout of Product Listing Ads will be key variables as the holiday shopping season ramps up next month. Consensus EBITDA margins currently call for a flat outlook next year; this is fair, but we continue to believe that Google should see margin erosion over time as mix shift moves away from search, creating some risk for downward estimate revisions next year. But it’s good to be a bellwether in an uncertain technology sector, and Google’s continued expansion of its international presence puts it in a great position to capitalize on a European economy that appears to be working through its trough. Facebook’s expected launch of video ads could take some wind out of YouTube’s sails, but Google’s unmatched suite of IP-based advertising offerings make it an indispensible outlet for most marketers. #1 agency holding company WPP (Market Perform) has noted of late that Google will likely pass 21st Century Fox (Market Perform) as its #1 destination for clients’ spending next year.”

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There are 2 comments

OCTOBER 19, 2013 11:07 A.M.

This is Really Insane! wrote:

Same Clowns. Different price!

By the way.

If you don't want your comments removed. Don't use the words Sergei and pants in the same sentence. Everything else is fine.

OCTOBER 20, 2013 6:17 A.M.

Rottan Frewt wrote:

Stupid Brian White gave Apple a target price of $1100 last year and thanks to Tim Cook Apple is barely at $500 after a massive value collapse. Larry Page is spinning donuts around Tim Cook when it comes to CEO skills. How the hell a Google share is worth double an Apple share is something Apple shareholders better ask themselves? How has Apple screwed up so badly as to let Google steal practically all their hardware business away using Android products? Google leads in search and in mobile OS platform. Apple doesn't lead anything except in the number of people standing on line waiting for iPhones. Meanwhile Android has 80% market share of the smartphone industry and is climbing still. Wall Street takes one look at that and knows they're going to stay the hell away from Apple. They know Apple is a dead-end investment. Google is totally embarrassing Apple. Why can't Apple do anything right? Apple has become the laughing-stock of both the computer industry and Wall Street investors. The Apple bulls must feel pretty stupid about now as Google heads for $1200 a share and Apple heads in the other direction. Bravo, Tim. You're doing a fine job in Bizarro-style.

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.